Is Enterprise Software Doomed?
The old ways of the software business are dying but there is still time for even old-fashioned vendors to reposition themselves and compete in the open-source era.
By Guy Smith, Silicon Strategies Marketing
Jul. 31, 2006
Like the old man slung over John Cleese's shoulder in Monty Python's Holy Grail, the enterprise software industry today is yelling, "I'm not dead yet!"
The reply is, "Well, you'll be stone dead in a moment."
The rumors of the death of enterprise software are premature, but a near-fatal diagnosis is not. Fundamental shifts in the competitive landscape are, at the very least, changing R&D practices, pricing, marketing, promotions, and buyer attitudes. The software industry that we all grew up with is indeed dead.
By swallowing a dose of reality and re-tooling their positioning, product and sales strategies now, most enterprise software vendors will live long enough to compete in the open-source era.
"He will be soon; he's very ill."
The entire IT stack can now be commoditized. With little effort a commodity stack can be deployed for 95 percent of all IT buyers. If you think this is an absurd view, ponder for a moment what has already happened to most of the stack:
Servers: Giants like e*Trade, Amazon, Yahoo, Google, and others are using x86 and x64 servers on everything except database hubs, and even those are targets for eventual replacement with massive multi-core x64 boxes. Little guys are using x86 servers universally. Operating systems: For new deployments, it is either Windows or Linux, and Linux - along with Microsoft's tardiness on Vista - has caused Microsoft server sales to stagnate. Linux was born a commodity, and remains such. Application servers: When Apache instantly dominated the Web server market, and started chipping away at the Java server market, once-mighty competitors started reeling. Application development: With IT shops highly favoring Web-based application development for new projects, we see PHP, Perl and other Open Source systems replacing proprietary tool sets (what was the last 4th GL you sold?) Databases: Oracle and IBM have retreated to the high ground, and gone as far as offering free versions of their DBMSs to low-end users, in an attempt to forestall adoption of commodity database systems like MySQL, PosgreSQL, and others. Applications: The last refuge of high margin software is coming under attack in segments like CRM (SugarCRM, Compiere, OpenSourceCRM), ERP (Compiere, ERP5, OpenMFG), messaging and collaboration (SendMail, PostFix, Open-Xchange, Astrisk), verticals (MedSphere, OpenEMed, OpenClovis) and horizontals (Open Office, Plone, Zope).
"Bring out your dead!"
What's a poor software vendor to do?
First, face up to reality. Open Source, facilitated by the Internet for both development and marketing/sales, has fundamentally changed the entire software market from bottom to top. Any profitable segment in which there is no Open Source solution will soon enough have one.
The good news is that you can still make money in the enterprise software business, and maybe as much as you did before. But the cost and revenue structures are rapidly changing, and you need to decide on a direction pretty quickly before the Dead Wagon comes around.
The two primary costs in creating and selling enterprise software are … well … creating it and selling it. Some broad estimates conclude that enterprise software sales and marketing may constitute upwards of 75 percent of the cost of licensing. In other words, most of what your customers spend their money on is your marketing and sales teams (and if your paycheck isn't very fat, then review your sales commission structure - the sales people have your kid's college fund).
The other major cost is creating and maintaining the product itself. Engineers, Q&A, design cycles, betas … these costs add up. And depending on how rapidly your market is evolving, these costs may be huge.
This cost burden is one of the reasons that Open Source has fundamentally changed the enterprise software business. The cost to develop software has been driven down by Open Source development practices, and the Internet makes selling solutions less expensive. This shift creates pricing opportunities that did not exist before, and makes the same solutions affordable to a much broader part of the market.
Thus with Open Source, total market space goes up, total cost to build and sell goes down, and though unit revenue may decrease, top-line revenues might not.
The reply is, "Well, you'll be stone dead in a moment."
The rumors of the death of enterprise software are premature, but a near-fatal diagnosis is not. Fundamental shifts in the competitive landscape are, at the very least, changing R&D practices, pricing, marketing, promotions, and buyer attitudes. The software industry that we all grew up with is indeed dead.
By swallowing a dose of reality and re-tooling their positioning, product and sales strategies now, most enterprise software vendors will live long enough to compete in the open-source era.
"He will be soon; he's very ill."
The entire IT stack can now be commoditized. With little effort a commodity stack can be deployed for 95 percent of all IT buyers. If you think this is an absurd view, ponder for a moment what has already happened to most of the stack:
"Bring out your dead!"
What's a poor software vendor to do?
First, face up to reality. Open Source, facilitated by the Internet for both development and marketing/sales, has fundamentally changed the entire software market from bottom to top. Any profitable segment in which there is no Open Source solution will soon enough have one.
The good news is that you can still make money in the enterprise software business, and maybe as much as you did before. But the cost and revenue structures are rapidly changing, and you need to decide on a direction pretty quickly before the Dead Wagon comes around.
The two primary costs in creating and selling enterprise software are … well … creating it and selling it. Some broad estimates conclude that enterprise software sales and marketing may constitute upwards of 75 percent of the cost of licensing. In other words, most of what your customers spend their money on is your marketing and sales teams (and if your paycheck isn't very fat, then review your sales commission structure - the sales people have your kid's college fund).
The other major cost is creating and maintaining the product itself. Engineers, Q&A, design cycles, betas … these costs add up. And depending on how rapidly your market is evolving, these costs may be huge.
This cost burden is one of the reasons that Open Source has fundamentally changed the enterprise software business. The cost to develop software has been driven down by Open Source development practices, and the Internet makes selling solutions less expensive. This shift creates pricing opportunities that did not exist before, and makes the same solutions affordable to a much broader part of the market.
Thus with Open Source, total market space goes up, total cost to build and sell goes down, and though unit revenue may decrease, top-line revenues might not.
Pages: 1 2
